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Number Cruncher

A portfolio that rides whatever trend is hot Add to ...

What are we looking for?

Stocks with strong momentum.

Our screen

Buying a stock simply because it's going up in price sounds like a strategy that is doomed to failure.

Surprisingly, though, it appears to do better than many more sophisticated methods of investing. Several academic researchers who have weighed the data find that investors who buy stocks that are shooting up in price tend to beat the market on average.

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Before you go rushing out to snap up a bushel of hot stocks, some caution is in order. "Momentum" investing, as this strategy is called, doesn't always work. (It tends to underperform when market volatility is high, for instance.) It can lose money if the market suddenly changes direction. And much depends upon your definition of momentum: Is it a strong price gain over one month, six months or one year?

One approach that has had success in the past is to pick stocks that have had strong momentum over the previous six months. Since that happens to neatly coincide with the first half of this year, we looked for the TSX stocks that have had the strongest total returns since January.

To rule out stocks that might be too volatile, we insisted that each stock on our list had to have some earnings over the past year and that the ratio of its price to tangible book value had to be three or less.

What we found

A wide spectrum of companies, some in high growth sectors but many in more mundane sectors.

Open Range Energy, the top company on our list, is an oil and gas exploration company. Acadian Timber owns timberland in New Brunswick and Maine. Global Railway Industries manufactures train equipment. All of them have achieved total returns of more than 60 per cent in the first half.

Will they and other companies continue to outperform? That's impossible to determine from a simple screen like this.

However, many companies on our list deserve a closer look. Several are trading at reasonable prices in relation to their earnings and they come in all sizes, from tiny firms to relatively well-known companies such as Precision Drilling and Harry Winston Diamond.

Follow on Twitter: @IanMcGugan

 
  • ONR-T
  • ADN-T
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  • PD-T
  • HW-T
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